Web 2.0 Apps

Other Pages

SS - Investing Money Annuities

What is an Annuity?

An annuity is an investment that requires the investor to invest the a given amount at the beginning of each year (time period) for a specific number of years (time periods). Interest is paid at the end of each year (time period) and remain part of the investment.

Annuity Example

$1,000 is invested each year for 4 years and an interest rate of 4% is paid annually.

Year

YearlyInvestment

InterestEarned

Investment Value at the end of year

1

$1,000

$40.00

$1,040.00

2

1,000

81.60

2,121.60

3

1,000

124.86

3,246.46

4

1,000

169.86

4,416.32

Exercise: The power of Time

Create a spreadsheet file to contain each of these Scenarios on different sheets.

The shaded cells are formulas.

Scenario #1: Invest Now

assume you are 15 years old and decide to invest $1,000 at 4% for each of the next 15 years.

After 15 years you stop investing money, but just let the investment grow until you are 65.

Scenario #2: Invest Later

assume you are 35 years old and decide to invest $1,000 at 4% until you are 65.

How did that Happen?

Which scenario has a higher value at age 65? By how much?

How much would need to invest each year in the other scenario to have the same value at age 65?

Scenario #3: Invest Always

assume you are 15 years old and decide to invest $1,000 at 4% until you are 65.

Think about how to create this sheet with re-doing everything!

How much would need to be invested each year in the other two scenario to have the same value at age 65?

For each scenario, how much would need to be invested each year to have $1 000 000 at age 65?

how does the interest rate affect the ending value? increase the interest rate by 2%, what happens?